October financial market seasonal patterns

October financial market seasonal patterns

September has come and gone and Q4 is about to begin. The nightmare of the pandemic returned in Q3 and virologists say it's not done yet. I hope they're wrong.

In the meantime, lets have a look at what history says are the strongest trends in financial markets in October. I tend to look at patterns over the past 20 years. Some like to look at 50-year patterns or even longer, but if it hasn't worked in the last 20 years, why should I care that it worked in the 1970s?

1) Yields tend to move up

Last year it was right around this time that the run to 1.8% from 0.7% started in 10-year notes. Of course, you could counter that there was an election in there and a vaccine announcement so it wasn't exactly a seasonal move. That's a fair point but rates have risen in 11 of the past 13 Octobers.

2) Dollar strength

By the looks of the first two, the moves this week have been front-running the October seasonals. October and November are both solid months for the DXY, but not spectacular.

3) Natural gas

Have the bulls had enough? Not if the seasonals have a say. The hottest commodity of the year benefited from the seasonal tailwind in September and that continues in October, where it's risen in 15 of the past 20 years for an average of 6.65%. I believe the time to sell natty will be that first cold day or cold forecast in New York. That's when the worries about a cold winter will take over and lead to a crescendo. Then again, if we actually get a cold winter, look out.

4) Gold

Oct is the second worst month for gold but the Nov-Feb period of strength is one of the most-reliable periods of seasonal strength in any asset. My dream scenario is an ugly breakdown in gold prices in October, to something like $1500. That would be an incredible buying opportunty.

5) Stocks finish strong

October isn't a great month for stocks but November and December are, particularly in Japan. Look for a dip to buy in October.

6) Oil slips

October and November are the two worst months for oil. Maybe OPEC will spoit the party? Or could a quick Iran deal lead to a reversal? If you want to be an oil bull, look for a dip in the next two months because the Jan-April period is very strong.

7) CAD sluggish

This should be no surprise after the oil note. Oct is the third worst month for the loonie and Nov is worst month.

Overall, I'm a big fan of seasonals but they're just one part of the toolkit. The fundamental picture is so important right now and here's a quick list of the main things to consider:

  • Inflation dynamics
  • Supply chain bottlenecks
  • Worker shortages
  • China: Evergrande, common prosperity and the growing odds of policy easing
  • Washington: Infrastructure, reconciliation and the debt ceiling
  • Energy crisis: It's taken on a life of its own

Those are all potential game changers and of a seasonal month that's not particularly constructive. Play it safe.